QMG Weekender – 14 May 2016

Last night capped off a disappointing week for US Retailers (their worst since the GFC). It saw Macy’s (M US) fall 15% in one day on the back of disappointing results. Kohl’s (KSS US) were similar, falling over 9% and Fossil Group (FSL US) were down -29% in a day. The shifting demand of consumers to more online purchases and paying for experiences like going to restaurants was echoed in the Kohl’s earnings call. This is especially becoming an issue for apparel sales because the need to go into stores to physically try clothes on is negated as online retailers often offer free returns. This type of competition usually leads to price wars that will be much harder for high street retailers which will put further pressure on their already contracting margins.

So what’s an investor to do? Well luckily, QMG data is able to harvest the vast amounts of macroeconomic data out there and give insights into the latest trends for various US sectors and below we’ll show how retailers are going to be under continued pressure, and what to do if you want some positive exposure to US equities.

QMG data for the department stores is covered in our US52.12 – Multiple Retailers product group and our latest data for March shows the following:

The fundamentals for the sector are still fairly solid but with prices being below zero and costs beginning to rise, the question remains whether there is enough room to discount further without affecting margins. Other retailers do not fare much better with both clothing and footwear retailers showing product groups in structural decline with demand/volume growth on their way down on top of already weak margins.

There have been arguments that the dynamics between supplier and store should lead investors to look more at the apparel makers/suppliers as they further distribute to consumers online. This disintermediation should lead to more positivity for apparel companies which needed to be done as their sales are affected by slumping department store growth.

However our data on the product group US apparel (US18) does not reflect this positive view:

We see their volumes down as well and whilst some may have made the move towards more internet based sales, the evidence does not show that they have done enough to compete with the online only offerings that hurt both them and high street retailers.

So if department stores, clothing, footwear and even apparel suppliers are under pressure, is it all doom and gloom for consumer discretionary? The answer is no and as mentioned in the Kohl’s call, Restaurants are an area that should be reviewed. We cover the US Restaurant (US55.3) industry and the data paints a much more positive picture.

Directionally, all 3 earnings driers are trending the way you’d want them to for a positive view. Shake Shack (SHAK US) was up +9% on Friday and the rest of the restaurant sector did not suffer losses as large as their other US Retailers.

On the other hand, if you buy into the bad news but are afraid you’ve missed out on the run against retailers, there may still be opportunity into the 2nd half of 2016. Our data shows that US DIY Retailers have a strong chance to decline over that time and we detailed this in our recent industry notes last week (“US Retailers, 12 May 2016”) and earlier this month (“US DIY – Retailers, 3 May 2016”).